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Future of US dollar between Trump and the Fed

The view of the Secretary of Treasury is based on the fact that the service sector represents 19.4% of the structure of the US economy, while exports represent 12% of the gross domestic product (GDP), but they directly affect the unemployment rate.

Ehab Zakaria
July 31, 2019 Comments Off on Future of US dollar between Trump and the Fed

The risks of the decrease in the value of the United States dollar in the future has become more realistic, according to the forecasts of investors after the International Monetary Fund (IMF) stated that the dollar would be assessed higher than its actual value from 6% to 12%, and according to the view of President Trump, to support the export sector in a short time.

Ehab Zakaria

This view contradicts with the Secretary of Treasury who sees that the power of the US dollar shall remain for a long time. The view of President Trump depends on decreasing the value of the dollar in order to stimulate the US export sector, which was accompanied by the tendency of the Federal Reserve (Fed) to decrease the interest rate. Also, the stall in the commercial negotiations between China and US are considered a reason for the Fed to decrease the interest rate.

The view of the Secretary of Treasury is based on the fact that the service sector represents 19.4% of the structure of the US economy, while exports represent 12% of the gross domestic product (GDP), but they directly affect the unemployment rate.

The revenues of US companies depend on the local market by 70%. If we assess the percentage of the dependence of sectors on the local market, we would find that the communications’ sector depends on the local market by 96%, while the utility sector depends on local market by 95%. These sectors would not benefit from the decrease in the currency value.

But, the technological sector, which depends on the local market by 59%, and also the raw materials sector, which depends on the local market by 51%, are the beneficiaries. Thus, China thinks that the decrease in the currency value is considered a currency war within an economic war.

A research issued by Morgan Stanley Bank reports that the dollar reached the top, and accompanied by the decrease of the stock price and the beginning of the increase of the revenues of the treasury bills, the expected slowdown would affect the growth of the US economy (the growth is expected to be by 2.3% next year, while the growth this year is by 2.9%).

Thus, that would lead to the decrease in the value of the dollar, and would be an optimistic view, regarding developing markets. A similar research by City Group stated that the dollar would be liable to decrease from 2% to 10% during a period from 6 to 12 months, while researches by JPMorgan Chase stated that the dollar would decrease in 2019, and would continue to decrease for many years if the growth rate of the US economy stayed below 2%.

Goldman Sachs emphasises that the probability of the decrease would be high in a year, while the ING Investment Bank asserted that the actual value of the dollar is less than expected. Moreover, Bloomberg Agency confirmed the expected decrease.

At the end of the second world war, and the rise of the US as a superpower, and according to the Bretton Woods Agreement for the cash management of the exchange rate signed in 1944, the US dollar became the currency of the cash reserves of countries. It was connected to the price of the gold, provided that the US shall be committed to replace the dollar by gold if necessary.

That framework continued until 1971 when US President Richard Nixon declared the cease of the replacement of the dollar by gold. The US dollar represents 60% of the cash reserves of countries and 40% of the transactions worldwide. Moreover, 85% of the commerce is based on the dollar and also 39% of the debts. In addition to that, the oil and gold trade depend on the dollar.

The expected decrease in the value of the US dollar may be an objective of Trump’s administration in order to stimulate the US export sector, and the increase of the interest rate may affect developing markets and would ward off the investments from them.